Alert

Now What?  – Texas Court Nationally Enjoins Corporate Transparency Act as “Likely Unconstitutional”

December 5, 2024

On December 3, 2024, the U.S. District Court for the Eastern District of Texas entered into a nationwide preliminary injunction against the enforcement of the Corporate Transparency Act (CTA) and compliance with the beneficial ownership information (BOI) reporting requirements to the U.S. Department of the Treasury Financial Crimes and Enforcement Network (FinCEN). The Court in Texas Top Cop Shop, Inc., et al. v. Merrick Garland, Attorney General of the United States found that the plaintiffs satisfied all prerequisites for a preliminary injunction. It went on to state:

Therefore, the CTA, 31 U.S.C. § 5336 is hereby enjoined. Enforcement of the Reporting Rule, 31 C.F.R. 1010.380 is also hereby enjoined, and the compliance deadline is stayed under § 705 of the [Administrative Procedures Act]. Neither may be enforced, and reporting companies need not comply with the CTA’s January 1, 2025, BOI reporting deadline pending further order of the Court.

The court stated that the CTA “is likely unconstitutional,” but it did not address the issue of the CTA’s constitutionality as applied to the plaintiffs or the plaintiffs’ challenges under the First and Fourth Amendments. While the third sentence in the language quoted above references the January 1, 2025, deadline, which relates to reporting companies formed before January 1, 2024, the second sentence in the quoted language above enjoins enforcement of all BOI report filings and includes reports for reporting companies formed after December 31, 2023.

Before the injunction, reporting companies formed before January 1, 2024, were required to file their BOI reports with FinCEN before the January 1, 2025, deadline. Reporting companies formed after December 31, 2023, were required to file their BOI reports within 90 calendar days after receiving notice of the company’s creation or, in the case of a foreign company, registration to do business in the United States.

An appeal by the Department of Justice is all but certain and we expect this to move quickly. However, the likelihood of the Fifth Circuit granting an appeal or how the proceedings will unfold is uncertain.  We are monitoring the status of the case along with guidance from FinCEN.

In the short term, reporting companies may want to prepare to file and meet the deadline while monitoring the situation. Consider, for example, having officers and directors of a reporting company that are “beneficial owners” obtain FinCEN identifiers to simplify the filing process. The FinCEN BOI E-Filing System remains active to file BOI reports.

It is important to note that the injunction affects BOI reporting to FinCEN. It does not affect state filing requirements, such as those imposed by New York.